How Countries Like Iraq—Not the U.S.—Will Help Determine Gas Prices to Come

The Presidential candidates love to talk about increasing oil production here in the U.S. But a new report from the International Energy Agency underscores the fact that it will be foreign countries like Iraq that will continue to dominate new oil production—and help control the rising price of gas.

If you think your gasoline fill up was expensive today, just be glad you don’t live in California, where on October 8 the price of gas hit an all-time average high in the state of $4.67 a gallon. (And if you do live in California, well, at least you’ve got sunshine and this.) The Golden State’s sky-high gasoline prices—nearly a dollar a gallon more than the current U.S. average of $3.81—is an outlier. A power outage last week at a refinery in Southern California cut the supply of gasoline in a state market that was already fragmented and volatile, the latest in a series of refinery disruptions. Indeed, while gas prices in California jumped 50 cents in just a week, action in wholesale markets indicate that pump prices should be dropping just as dramatically as refineries return to action.

Still, gas prices throughout the U.S. have remained high throughout much of 2012, even if they never quite reached the $5-plus a gallon range that some analysts warned about earlier in the year. There’s a simple reason for that trend: oil is expensive. Brent crude—a trading benchmark that includes oil in Europe—is currently at $111 a barrel, and has remained in the triple digits for most of the year. That’s despite the fact that the global economy has remained sluggish, which would usually depress the demand for oil, and with it, the price. But 2012—in part because of the tightening embargo against Iran, which has taken millions of barrels off the market, and in part for reasons no one quite understands—has been different. The question going ahead is whether expensive gas is simply the new normal.

All of which is to say that gas prices are on American voters minds again, just a few weeks before the Presidential election. At last week’s debate, Mitt Romney and Barack Obama clashed over domestic oil production, with Romney chastising the President for holding back American drilling:

Mr. President, all of the increase in natural gas and oil has happened on private land, not on government land. On government land, your administration has cut the number of permits and licenses in half. If I’m president, I’ll double them, and also get the — the oil from offshore and Alaska. And I’ll bring that pipeline in from Canada.

That’s part of Romney’s much-touted energy plan, which he promises will enable North America to become energy independent by 2020, chiefly through massive increases in domestic oil and gas production, and the fast-tracking of pipelines that will carry Canadian oil sands crude to gas stations in the U.S. “This is not some pie-in-the-sky kind of thing,” Romney said when he announced the plan in August. “This is a real, achievable objective.”

But increasing domestic oil production almost certainly won’t be enough to achieve energy independence—let alone significantly lower fuel prices. That’s because—as we’ve said in this space many, many times—oil is a global commodity, and it’s price is set on the global market as a product of global supply and demand. If China and India keep using more and more oil—and there’s every reason to expect they will—oil is likely to remain costly into the future even if the U.S. and Canada can pump more crude out of the ground.

In fact, whatever the U.S. does or doesn’t decide to do with its potential oil supplies probably won’t be that important to the global crude equation. That’s one lesson of a new report out today from the International Energy Agency (IEA) that forecasts the potential for vastly increased oil production out of Iraq. Iraq used to be a major oil power, but years of anti-Saddam sanctions in the 1990s and the 2003 U.S. war and its destructive aftermath reduce production to nothing. Oil production has picked up significantly recently, however, reaching 3 million barrels a day, enough to help offset the loss of Iranian oil.

Now the IEA suggests that Iraq could produce much, much more. The report suggest that with the right investment, Iraq can be expected to double oil production to 6.1 million barrels a day by 2020, and could reach up to 8.3 million barrels a day by 2030. If that happens it would make Iraq—not the U.S., Canada or any other country—by far the largest contributor to global oil supply growth. For a thirsty Chinese economy, Iraq—well situated geographically—could be a major supplier. “In the supply side of the global oil equation, Iraq is by far the most important player,” IEA chief economist Fatih Birol told me by phone. “How much additional oil Iraq can bring to production will have an enormous effect on oil markets.”

It’s not just that Iraq has a lot of oil—the third-largest conventional resources in the world. It’s that Iraqi oil is much cheaper to produce than the costly unconventional oil that politicians like Romney are counting on in the U.S. and Canada. That means Iraq can scale up productions significantly without bankrupting itself—and it can sell that oil at the world market without fear that they might lose money should prices suddenly drop. (Unconventional oil like Canadian oil sands and U.S. shale oil tends only to be profitable if oil prices remain high, which is one reason why tapping those supplies won’t automatically lead to cheap gasoline at the pumps.) “Iraq is a major new energy powerhouse,” says Birol.

Of course, projections are just that, and the IEA also includes scenarios that would see Iraq increase oil production at a much slower rate. Skeptics will also note that predictions of vast increases in Iraqi oil production have been made—and broken before. In 2009 Iraq’s oil minister told reporters that his country would be pumping 12 million barrels of oil by 2015, which, it’s safe to say, will not happen. The IEA estimates that Iraq will need over $500 billion cumulative investment over the next couple of decades to reach its full potential on oil production—and more than money, it will need social stability and a solid government, neither of which is assured.

But Iraq’s potential demonstrates just how unpredictable global oil markets are likely to remain, and underscores the fact that the price of crude will still be mostly set by other countries—no matter who wins the election in November. Which means that if we really want to protect ourselves from California-style gas prices, we have one really effective policy: energy efficiency. That’s something only one Presidential candidate is really offering—and it’s not the one with the North American energy independence plan.

Walk. Buy a house that isn't 50 miles from where you work and play. Buy a car instead of a giant truck or SUV to haul your fat a$$e$ around in. Take responsibility for yourselves instead of blaming the President. Stop believing half-baked pipe dreams about drilling in national parks. There isn't enough oil there. Get over it. No amount of pipelines from Canada are going to help.

Uh, I live in NoCali, and I purposefully checked out gas prices today whilst running errands. Gas for my vehicle clocks in at $5.08 (and that 9/10 of a cent) per gallon at the LOWEST price I was able to find.

Gas prices rise as soon as a mouse fart of a whisper that ANY circumstance will affect the price of oil, but it takes FOREVER for the price of gas to go down, even with all the "tra-la-la, the price of oil is going down" talk.

And just how is "energy efficiency" supposed to reduce gas prices more that additional supply.

If the author is right that world supply and demand will set oil/gasoline prices, any reduction earned through energy efficiency would decrease demand but not more than an equivalent amount of additional supply.

Here's a thought. Why not BOTH increase efficiency AND increase supply! Obama has all but put federal lands off limits to energy exploration, costing us supply not today or tomorrow but in the not too distant future. We need clean coal, of which the US is the world leader but instead we get Solyndra and several other failed ventures.

Obama appears clueless in the face of hard facts making American families less well off than when he took office.

The premise of this article is incorrect, namely there IS a disconnect between the price of locally produced oil and the international market. This is seen in the spread between the price of Bent and West Texas Intermediate crude. In the 2012 WTI has consistently been $20 or more dollars per barrel cheaper than Brent. It is cheaper because local supply is increasing and is not effected by risk in the middle east.

It's cheaper because not all crude oil is created the same. West Texas like Saudi oil is low sulfer, otherwise known as 'Light, Sweet' crude. Oil like Venezuela and Iran have hugh-sulfer oil, thus they must discount their oil based on the 'West Texas' price.

"It’s that Iraqi oil is much cheaper to produce than the costly unconventional oil that politicians like Romney are counting on in the U.S. and Canada."

This one sentence is the key to the whole article -- and, yet, it's phrased in a way that completely misses the point.

The era of cheap oil is over. Long gone are the days when you had to be careful with a shovel in Texas lest you set off a gusher; Deepwater Horizon was a seven-mile-deep well (deeper than Everest is tall) a mile below the ocean surface (as far below the waves as Denver is above sea level).

And the reason that "Drill, baby, drill!" is the chant of the day is that even rigs like Deepwater Horizon are running dry.

All in all, we've used up about half of the planet's oil reserves. There's still plenty of oil left in the ground -- about as much as we've dug up, in fact.

But it should come as no surprise that we've already dug up the cheap, high-quality stuff, and that it's mostly dregs that're left.

Like those Canadian tar sands.

On local and regional scales, the rate of extraction tends to decline as fast as it grew once the 50% mark has been reached, with prices climbing accordingly. We can expect the same to happen globally, with about a 3% annual decline. By mid-century, we'll be extracting oil at the same rate as we were in the 70s, and we'll be back to pre-World-War levels by the end of the century.

Whether we like it or not, for the simple fact that it'll be so expensive to extract and refine what's left that we won't have any choice in the matter.

But wait! There's more!

Though there're lots of other energy sources that're still abundant (especially solar, but also coal, natural gas, and uranium), none of them are well suited for making agricultural fertilizer or for use in our transportation infrastructure. You can't fertilize your crops with coal; you can't run your combine harvester with coal; and you can't deliver your crops to market with coal.

So, expect food prices to rise roughly in line with petroleum prices...and expect that particularly nasty double whammy to do a number on the global economy that makes the Great Depression look like a walk in the park.

The good news is that, if we as a society can make it through the looming petroleum crisis, it'll only be by transitioning to something sustainable such as solar. It won't be cheap -- but the days of cheap are over. But solar energy is abundant on a scale few realize: enough sunlight falls on American rooftops to power the entire planet's energy demands.

There were electric cars over 100 years ago. What happened? We can put a man on the moon but can't figure how to separate ourselves from oil! Come on now. We've got all these universities that receive government grants in one form or another and we're still stuck? Oh wait "Big Oil" and "Big Pharma's" and all the other big's of the world control our "Puppet Congress People". What a sad state of affairs the US has gotten itself into. Just rid the US of a common government and let the States govern themselves which in turn would give us the right to go to the State that serves it's citizens the best. WE ARE TOO BIG to be governed by a bunch of knuckleheads. Actually we're in the "Too Big to Fail" category and should be broken apart.

War is money in someones pocket. Oil amp; Big Pharma is the same. No doubt we are being held back from any progress on independence from oil/gas. I think the day they create solar that is affordable is the day we all free ourselves. My parents had solar generated hot water back in the 80s in our house. I'm wondering what the heck happened since then. Why can't we get there? There should be major government funding into solar and other alternative power.

It's been very telling when Democrats have tried to add language requiring oil drilled in the US to stay in the US. The Republicans (read oil companies) want nothing to do with it.

Also recently heard an petroleum analyst say that the Saudi's now have to make sure oil prices stay high so that they can continue to pay off the growing young population there that have no prospects or opportunity. The royal family run welfare state is growing and we have to pay for it.

Yeah that sounds good but OPEC countries agree on production and then go do what they want and if the Saudi's want to hold back production or slow availability it effects market prices. I'm sure you also know that the oil market is a speculative market and the Saudi (and other countries) expected future policies will be factored into prices.

Saudi Arabia knows (and have stated publicly and privately that crude over $100 is too high and will cause demand to tapper off in the future, thus they are producing quite a bit more since Iran got sanctioned into the stone age in spring.

BUY ELECTRIC CARS Those coupled with hybrids will begin to make people see the value in electrics and the foolishness of the pursuit of oil. The oil companies have already demonstrated their fondness for us by shipping the current surplus offshore. Dump these bastards now and get on with the other problems. God knows there's no shortage.

The speculators and the traders manipulate and control the oil price. Google the "$2.5 Trillion Oil Scam - slideshare" and google the "Global Oil Scam." The US is a victim of this scam. Purchase electric cars and solar panels.

Tar sand crude from Canada isn't targeted for US gas stations. The addition of the tar sands pipeline will actually push US gas prices up. The dirty, heavy, nature of the source product means its primary target is the global diesel market. Keystone executives already stood down when a Congressional Committee asked for their commitment to the end-product staying in the USA.

Both parties need to display leadership about issues with knowledge, not spin.

Well said. Also, to keep shale oil pumping the crude prices HAVE to stay above a certain level. Wall Street expects the profits to grow beyond a certain percent year on year and the C-level executives need to maintain the Christmas bonuses by giving wall street the profit numbers. But the best part is that many countries around the world WILL control prices otherwise their govt will fall, the US consumer as usual is asked to asked pick up the tab for all that shale oil investment.

You may wish to double check your numbers. The prices are rising now, so that they will start to fall rapidly come Nov. 1.

And guess who will get credit? Certainly not Mitt Romney. Nope, pResident Soetoro will get credit. One problem though, he will not tell you that he personally, was involved in the rise of gas prices recently. Think I full of it? Well, we shall see, won't we. If I am correct, (and I am) prices will start to drop, and probably hit $3.25 by Nov. 6.

Now, what was that about the oil companies? We shall see, we shall see..........

Romney is a tax cheat huh? I guess you didn't get the memo. Romney released his taxes, and he paid an AVERAGE of 20%. Never cheated, never missed.

Now, can the same be said for Harry Reid? Oh, we will never know, ALL of his records have never been released.

Off shore accounts. Oh, come on! Keep up already!

The offshore accounts Mitt Romney had were ALL funded with money HE PAID HIS TAXES ON FIRST!

Now, Debbie Wasserman Shultz (D), and Nancy Pelosi not only have offshore accounts, but they also have investments in FOREIGN banks!!! No taxes paid on any of it. How do you think Nancy Pelosi went fromn a net worth of $12 million in 2007 and is now worth over $25 million? Hmmmmm?

Same with Waserman-Shultz.

Oh, but I guess since they are liberal and Demon-rats, then it's okay. Right?